1. Field of Invention
The present invention relates generally to electronically transferring funds between accounts, and more particularly, to consumer directed funds transfer mechanisms using automated clearinghouse networks.
2. Background of the Invention
There is presently a need for a fast, low cost mechanism by which individuals can electronically transfer funds to other individuals, businesses, and financial institutions. Currently, consumers have only a few, narrowly applicable mechanisms for electronically transferring funds to others, small businesses, or financial institutions. Debit cards are useful only for transferring funds to retail merchants that have machines that can read a debit card and access the Point of Sale (POS) system. Many businesses that are not retail outlets do not have the necessary POS terminals, and thus are unable to obtain funds from consumers in this manner. Likewise, other individuals to whom a consumer would desire to transfer funds—friends, relatives, servicemen and repairmen—do not have POS terminals, and thus cannot use this system for transferring funds.
In some cases, a consumer has a need to transfer funds between accounts at different financial institutions, such as from a bank account at a bank to a brokerage account at a brokerage firm. The POS is not designed to support this type of transfer, and further, even if it were, financial institutions generally do not have POS terminals. Finally, there is a need to transfer funds remotely (e.g. over the Internet) where a debit card/POS machine system cannot be used since there is no physical presence of the sender's debit card and the receiver's POS machine available.
Electronic wire transfers are one alternative for funds transfers. Wire transfers are fast and can even be initiated over the telephone, and are typically transacted the same day. However, they are very expensive, typically $10-$25 if done by the sender's bank; retail wire transfers, such as through Western Union or MoneyGram, can be even more expensive, since they are priced at about 8-10% of the transfer amount. Retail wire transfers also inconvenience the recipient, by requiring the recipient to travel to a local retail outlet to receive the funds in cash, and then to travel to his bank to deposit the funds in a bank account. The high cost and inconvenience essentially eliminates wire transfers as an effective and useful tool for consumers to use for small funds transfers.
Bill payment services, such as CheckFree, provide limited types of funds transfers, and generally require the sender to be previously registered with the service to provide the sender's bank account information for verifying creditworthiness. For fully electronic transfers of funds to recipients, CheckFree requires the recipient—typically only a business—to also be previously registered and to have provided its bank account information as to the accounts designated to receive funds. For recipients who are unregistered, CheckFree will mail a check, which may take several more days to arrive, which require the recipient to manually deposit into its account, and often several days to clear.
Credit cards payments are also fast, but can be used to transfer funds only to authorized merchants—not individuals, many small businesses, and financial institutions. Credit card processors also impose their own costs, typically charging the receiving merchant 2-4% for card-not-present payment and a minimum around $25 per month for servicing the merchant, along with hundreds of dollars of setup and equipment costs for the receiver—clearly making this impractical or impossible for households and many small businesses. The prevalence of credit card fraud is in part responsible for these high costs. In addition, the sender may have to pay high interest on the transferred funds—as a cash advance or a charge—which further reduces the desirability of this mechanism. Often the interest and fees equal an interest rate of 20%-40% per annum, a price so high it is repellant to many consumers. Finally, many consumers have bank accounts but do not have credit cards, making this system unavailable to them.
Between financial institutions themselves, various automated clearinghouse systems (ACH) are used to transfer funds at relatively low cost, typically $0.04 per transfer or less. However, by its very nature the ACH only services financial institutions directly, and corporate customers indirectly, but typically not individuals or small businesses. One reason for this is that by regulation, the sender (“originator” in ACH parlance) of an ACH transfer must specify the routing/transit number and the account number of the recipient (“receiver”) before sending the transaction. That is, in order to transfer money to another person's bank account, the sender must know that person's bank account number and the routing/transit number of the receiver's bank. While the recipient may be willing to provide this information to some senders—for example, to the recipient's employer to receive direct payroll deposits—the typical consumer is unlikely to have this information about infrequent or casual recipients (e.g. businesses, friends, relatives). Obtaining this information may often not even be possible, since recipients may not want to release this information to potential senders. Thus, ACH transfers are typically limited to corporate customers who have pre-existing relationships with financial institutions, that is, who are registered with their financial institution ahead of time to send and receive ACH transfers, and who have received pre-authorizations from others to transfer funds to and from their accounts.
Thus, most banks and other financial institutions connected to the ACH simply are not set up to provide ACH transfers for consumers to make transfers to individuals or small businesses. First, ACH regulations inhibit this practice by requiring the account information of both the sender and the receiver of an ACH transfer to be specified in transaction, as mentioned above. In practice, an ACH transfer requires both the sender and the receiver to have previously registered with their respective financial institution to originate ACH entries. Consumers are hardly likely to so register with their financial institutions for the occasional ACH transfer to a friend, relative, or business. Another barrier is that the financial institutions typically require the sender to physically visit a branch for at least the first transfer, making this process even more inconvenient.
Another reason that financial institutions do not provide ACH transfers directly to consumers is that originating financial institutions (“ODFI's” in ACH parlance) bear the credit risk of insufficient funds. When an originating financial institution releases a credit entry (payment to another account from the originating financial institution, e.g. direct payroll deposit) on behalf of a sender, the institution is liable for the funds. Because of this, banks will often not accept originating transactions from a sender unless the sender has an account at the ODFI. This allows the ODFI to directly verify that the sender has sufficient funds before sending the credit entry; if the sender does not have sufficient funds, the credit entry is refused. However, this restriction eliminates the financial institutions from directly providing a funds transfer service to the public in general, since the average consumer is not going to open a bank account at a bank in order to do a single funds transfer.
However, the real risk to financial institutions is not the credit risk from credit entries—since the financial institution can immediately check the sender's balance. Rather, the credit risk arises when an originator requests a debit from another entity's bank account, that is, when the originator requests to withdraw money from another party's account. In this case, since the “paying” party can repudiate the debit after the fact, the originator's financial institution must be sure that the originator has sufficient credit to cover the return of the funds to the paying party. Since this return may occur well after the original debit was made, the financial institution must be sure that the originator is creditworthy.
Opening up the ACH to individual consumers would seriously expose a financial institution to increased credit risk in the absence of a means of ensuring sufficient funds for all transactions. For this reason, originating financial institutions employ careful procedures to select which corporate customers on whose behalf it will originate credit entries, typically limiting ACH transfers to reliable corporate customers with sufficient account sizes to accommodate the anticipated transfer activity.
Accordingly, it is desirable to provide a low cost, fast, and ubiquitously available mechanism for the electronic transfer of funds. A desirable system would allow a consumer to transfer funds to any other individual, business, or financial institution account, without previous knowledge of the recipient's account number. Other desirable features would prevent or reduce the likelihood of fraud in such funds transfers.